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Edited Transcript of ENFC earnings conference call or presentation 19-Oct-18 12:30pm GMT

Q3 2018 Entegra Financial Corp Earnings Call

Franklin Oct 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Entegra Financial Corp earnings conference call or presentation Friday, October 19, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Bright

Entegra Financial Corp. - Executive VP & CFO

* Roger D. Plemens

Entegra Financial Corp. - President, CEO & Director

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Conference Call Participants

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* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - MD & Head of Research

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - Director

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Presentation

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Roger D. Plemens, Entegra Financial Corp. - President, CEO & Director [1]

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Good morning, and thank you for joining us for our Third Quarter Earnings Call for Entegra Financial. I'm Roger Plemens, CEO, and I'm joined by David Bright, our CFO.

I would refer you to the forward-looking and non-GAAP disclosures included on Slides 2 and 3 in the earnings call slides.

Again, good morning, I'll give a brief introduction and overview and then David will cover the financials for the quarter. We continuously focus on strategy execution. They are summarized on Slide 4. We continue to look for rural deposits -- to seek deposits in the rural markets that are less competitive and less price sensitivity, and we did have an excellent quarter for deposit growth.

We continue to focus on relationship banking in our high-group markets, continue to seek relationships that provide both lending and deposit opportunities.

We're continuing to develop our SBA and mortgage business, higher rates and a shortage of inventory, in some of our markets have hurt the mortgage line of business, but the SBA business continues to grow. We're continuing to look at a strategic M&A, looking for opportunities that further our strategy, but exercise discipline. We are unable and unwilling to pay many of the high prices that are currently demanded. And right now with our stock price, there are limited opportunities that we can seek. Therefore we're looking at -- we need to focus on organic growth.

We remain focused on our return on equity, currently over 11%. The Southeast economy continues to be strong, driving organic loan growth, and as I said, we will continue to look at M&A if it makes sense based on where our stock is currently trading. If those opportunities arise, we will be looking at rural banks with strong deposits and providing liquidity, looking for relationship banking opportunities in the metro markets, and we're open to the strategic opportunities that make sense.

The Asheville branch, we purchased during the quarter, expected to open in the first quarter of 2019. That's an excellent market, strong economy, employment and the housing market. We expect this market to be more of a relationship banking market, and we have had an LPO in that market, so we have that jump-started with a bit nearly $40 million in loans. We recently announced the hiring of Russ Williams, our Greenville Market Exec, and again to stress that we'd like to build out that market relationship banking.

And now I'll turn it over to David to cover the financials.

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [2]

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All right. Good morning, everybody. Thanks for dialing in early. I'm going to walk you through the rest of the financial results for the quarter, hopefully, you've got the slides there. We updated the slides a little bit for the quarter, added a few more items to help walk through some of the key issues for the quarter. So if you have those handy, I'll, kind of, be starting on Slide 5 and I'll walk you through. Before I do that, let me just remind everybody that we do show adjusted numbers, those are the primary numbers we focus on, and for us, adjusted excludes merger expenses and investment gains and losses.

This quarter, we had very little of both of those. Most of the merger expenses from our last acquisition, the Chattahoochee Bank of Georgia, those are largely behind us, and we had -- didn't have any investment gains and losses this quarter. So GAAP and adjusted are pretty close this quarter. And then a reminder that we don't provide earnings guidance.

So with that, I'll start on Slide 5, highlights for the quarter. You can see and know where we are on adjusted basis, $3.6 million income, just below 90 basis points ROA, a little bit over 11% return on tangible equity, still mid-60s on efficiency ratio and we came in at $0.51 for the quarter on an adjusted basis. So all that is up, fairly, significantly over the same quarter in the prior year. This -- most of this growth would be driven by the last acquisition we did, which was Chattahoochee Bank of Georgia, which continues to be a pretty strong performer for us in terms of the income that they're providing to the bank.

Slide 6, our earnings trends have been relatively flat, the last few quarters. We -- this -- we've really been driven by growth for the last few years, a lot of that growth has been M&A, some organic. The environment here over the last several quarters has been difficult on the organic growth side, deposit growth in particular has been challenging as it has been for much of the industry.

And with our stock price down, as Roger mentioned, M&A is much more difficult today than it was several quarters ago. So we're quite mindful of that. We're not going to do a transaction that's overly dilutive to us. So right now, we are -- have been sitting tight and M&A has not been a strong option for us here. So that's really the main driver for, sort of, some of the flatness over the last few quarters in our results. We are very focused now on organic growth. I'll get back to deposit growth here in a second, but that is -- that's the key for us going forward.

Slide 7, I think everyone notice, certainly already, but the yield curve does continue to be a challenge that 2/10 spread has been hovering in that 25 to 30 basis points range. That's clearly had an impact on us.

If you look on Slide 8, our margin has compressed some mostly as a result of higher funding costs. We are doing what we can to manage that. We have done some derivative activity. We've tried to restructure the investment portfolio to focus more on assets that will adjust as rates adjust. So we are trying to manage this difficult spread environment, but there, of course, are our limitations to what we can do there, and it certainly has had an impact on us. So our margin is down from this quarter. Our deposit costs are up -- were about -- were up about 16 basis points from the last quarter. Advances, of course, continue to price up, those are up about 33 basis points from the second quarter, now stand at about 2%. And so while our overall asset yields are going up, they are going up slower than the liability side of the balance sheet and that is putting some compression on NIM.

We are, I think, being disciplined on loan pricing. We have been pretty successful raising our loan pricing as market interest rates are going up, but it is difficult to keep up the same -- that same pace as the liability side. Most of the new commercial loans we're putting on now are 5.25% or higher, so we'll continue to be as vigilant as we can on pushing the loan side up the pole. We still have a little bit of opportunity to remix investments to loans, but most of that remixing is behind us.

Slide 9, fee income. I've put a chart in there that, hopefully, gives you snapshot of what's going well and what's not. A couple of positive items to note for the quarter are: Servicing income with interest rates being higher, the value of our servicing rights has increased and we're not having the wright-downs that we had the last couple of quarters. We carry our servicing rights at fair value, so as fair value goes up, we pick up that income immediately. So I would expect at this point, if rates continue to go up that, that servicing income may continue to do well.

Mortgage has been down somewhat for the quarter. The higher interest rates are definitely impacting volumes there. They've definitely impacted our pipeline. So I don't expect mortgage to be strong or growing here in the next -- for the foreseeable future as long as rates stay high, that will definitely have an impact on us.

SBA, on the other hand, is -- continues to perform well. To remind everybody, we hired a Director of SBA earlier this year. And I think, you can see in the results there, the fact that business is doing well. It's been performing more consistently, and I think we are still optimistic that, that is the business that will continue to grow for us as we go into next year. The rest of the fee income lines, as you can see there are generally flat, so servicing income and SBA income are the 2 areas, that I think, we may see some growth here in the coming quarters.

Slide 10, noninterest expense. Again, I have charted out the main category, so you can quickly see, what's going on in there. Most of our expenses have been pretty flat. Compensation is up somewhat this quarter. We did hire an executive this past summer who was in there for the -- her salary is in there for the third quarter. We have one of our executives retiring, so for the third and fourth quarter this year, we have essentially 2 people in that executive position. So that has had some impact on our comp.

And we do continue to invest in new positions, mostly, that are revenue producing. Roger mentioned Russ Williams as example of another executive we've hired recently, who is an experienced commercial banker in Greenville. And so we are willing and planning to continue to invest in positions that can really add to our organic growth and revenue.

Again, most of the other categories that are pretty flat. Our professional costs are up somewhat. We have had some higher legal expenses, as we continue to pursue recovery of the Chattahoochee tax penalty, and that's the main driver of the professional cost. I mentioned before, most of our merger expenses are behind us, don't expect a lot there and not really any material increases in expenses or new projects here in the next quarter or so. Again, other than people that would help us on the growth side.

Slide 11, asset quality. Very little to say there. Asset quality continues to be strong, still well below 50 basis points on NPAs and NPLs. We continue to be vigilant and look for signs of weakening on the asset quality side, but at this point, in the markets we are in, we're really not seeing anything.

Slide 12, organic loan growth. So this would be loan growth, excluding anything acquired in M&A. Still running about 6%, that growth has clearly slowed down, some since prior quarters. Based on our current pipeline, I think that this 6% is a reasonable estimate for what we expect here in the coming quarter. So that's where we stand on loan growth. Most of this continues to be CRE driven. A good bit of our mortgage production is sold, so that's not a driver of balance sheet loan growth. And so again, most of this is coming from CRE -- most of this is coming from our metro markets of Greenville, Gainesville, Asheville. And so those continue to be drivers of our loan growth.

I'll mention real quickly on income taxes. We did have a slight uptick in our rate this quarter. Higher interest rates are raising our TEFRA add-back and also some of our income -- more of our income is coming from Georgia right now, so we've had a little bit of uptick in state income taxes, as the Georgia rate is quite a bit higher than the North Carolina rate.

We are almost through our federal NOL. We expect the next 6 to 9 months to completely use up the rest of the NOL we have. And so we'll be looking at our NOL protection plan here in the next 6 to 12 months to determine if we still need that plan.

I mentioned legal, we continue to pursue recovery of the tax penalty. I'm not able to make a whole lot of other comments on that, other than to say, we are aggressively pursuing that and that's a material item for our shareholders and we are -- we believe we need to recover that.

A quick comment on CECL. Our -- continuing to be pretty focused on getting ready for that. We've hired a consultant to help us do some preliminary planning for that, and still expect to have a first run of that by the end of this year. So we -- I believe, we are well underway to be ready for CECL.

I'll finish up with Slide 13 and 14 on deposit growth. Clearly, one of the bright spots for the quarter. Slide 13, I have showed you what our betas are there. And as you can see, we went a couple of years, where we intentionally kept our betas very well. We actually had 0 and negative betas for quite a long time. We did not raise deposit costs. We had an investment portfolio to draw on, and we were able to keep deposit betas really, really very close to 0 and not raise rates.

At the last few quarters here, we believe, we are now in a position where we do need to grow deposits, and so we have much more aggressively raised rates. And you can see our betas here for the last couple of quarters are definitely up from where they were historically. But the flip side of that really is Slide 14. Now we had a very successful quarter on growing deposits, almost 10% on an annualized basis in the third quarter. Most of that is core deposit growth coming from money market that we offer.

And our plan is to continue to be aggressive and to try to raise core deposits. And we have some wholesale borrowings, we've taken in the last year. We would like to get those repaid and we want to continue, trying to drive the balance sheet with core deposit growth.

And so our pricing continues to be aggressive. We've actually made some adjustments there, already, in the fourth quarter to keep this going. It is a difficult deposit environment right now, but we believe that if we price things correctly, we're in good markets, we have the rural markets to draw on. We're hopeful that we can keep deposit growth going and that will be -- that's very, very important to us, to get our earnings growing again, as to get the balance sheet growth going as well.

I'll make a quick comment on capital. We remain just slightly over 9% on the bank, a little bit below 8% TCE. So we are fully leveraged now. We do have the holding company revolver that we can draw on, if we needed it. There's $10 million available there. So that is a possibility for us. Other than that, our continued preference would be to raise capital in conjunction with an acquisition. Outside of that, I don't think we have any plans to do anything, right now on capital. Of course, if the stock price being quite low right now, that would also suggest that now would not be a good time to do that.

So and then one final comment on interest rate sensitivity. We continue to be very neutral. But we don't know if rates are going up or down. So we try not to make a bet, one way or the other. And I mentioned earlier, we're trying to use a number of different strategies to manage the flat yield curve in a rising interest rate environment that we seem to be in. So we will continue to try to use all the tools available to us, but again, the ultimate goal of staying neutral. And that is the main comments I had on the financial side for the quarter.

With that, I'm going to open the line back up. And Roger and I'd be happy to take any questions that you have.

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Questions and Answers

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [1]

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Laurie Hunsicker, Compass Point. I just wanted to start with what you were just talking about, the fact that you had a $10 million holding company revolver, and certainly your stock is looking very cheap priced above price trends. Can you talk about what price potentially it makes sense to look at share buybacks?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [2]

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Good question, Laurie. We've had this discussion internally here in the last week or so. We would be open to give in some more thoughts to the buybacks. So one challenge we have is, we don't have a lot of excess capital right now. You're seeing right below 8% TCE, that's -- that would definitely be a challenge to doing a lot of buybacks. But it is something we're willing to give some thought to.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [3]

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Okay. And then can you just talk a little bit about, as we look out to next year, what that SBA line could potentially look like?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [4]

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I think the director we have believes that we could grow that to, in the foreseeable future here, to about $30 million a year business for us. Right now, that's about -- we're doing about -- we're selling about $10 million a year right now. So we do think over the next couple of years there, there is the potential to double or even close to triple that. So it's a first time, we've ever had a director and it's the first time we've really run it as a separate line of business. So he is aggressively trying to find more lenders and grow that business.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [5]

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And as we think about that into the income statement, so 2017, it was small, whatever, $500,000, $550,000, this year probably comes in close to $800,000, next year it could be potentially $1 million, $1.5 million and then we could see that in 2020, potentially go further up. I mean is $2 million out of the question, if we think about how that would look into fee income?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [6]

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I don't think it is. We haven't done -- we haven't finished our budgeting for next year, but my, sort of, preliminary best guess for next year is that we were running about $1 million clip now, $250,000 a quarter. I think $1.5 million for next year is probably a reasonable kind of ballpark.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [7]

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Okay, great. And then just lastly, can talk a little bit about -- a little bit more maybe directionally about expenses in terms of a quarterly run rate. If we think about the fact that your comp and benefit line included some additional higher sort of a double count because the people doing the same job and then add that into the Asheville opening. How should we be thinking about noninterest expense on a run rate -- on $1 run rate?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [8]

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Yes, sure. For this quarter, fourth quarter, I don't think we'll be hiring many folks for Asheville, but Q1, we'll definitely see probably 2 to 4 positions get added to get the Asheville branch up and running. So there'll definitely be some expense there. Again outside of that, other than picking up commercial bankers in more of the metro markets that are helping produce revenue, I don't see a lot else besides that.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [9]

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Okay. Or maybe I ask a different way. If we are thinking about efficiency ratio, do you have a goal in terms of what next year would look like?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [10]

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Well, I mean, our ultimate goal is, we need -- we'd like to get down in the 50s. To be honest with you, we're going to need to really grow revenue in the balance sheet to get that to happen. So other than that, I don't know, that I have a more specific number for next year just yet.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - MD & Head of Research [11]

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Okay, David, it's Joe Fenech with Hovde. Just one question, most of my questions were just asked. But it looks like you're at about 10 to 12 basis points flip in terms of margin price -- margin compression per quarter. I know that's kind of simplistic way to look at it, the longest we, kind of, continue to see rate hikes at the pace we have been seeing them, is that just where we're going to be? Is that just what the expectation this year for margin compression going forward until this interest rate environment kind of levels out a little bit, that you're going to see low double-digit margin compression per quarter?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [12]

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Yes, I don't think we have the same level of margin compression this quarter. Our goal for this quarter is actually to pay down some of the wholesale borrowings, which are more expensive than our core deposits. But generally speaking, yes, I mean I think margin compression is something we're just going to fight. We've got to make that up with volume growth, and that's the reason why we're trying to push so hard on the deposit growth. I mean, if you're giving up something on margin, you've got to make it up on volume. And so that's really the plan here that we're trying to accomplish.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - MD & Head of Research [13]

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Okay, so maybe more of a 5 to 10 basis point, kind of, compression for the fourth quarter but then first quarter next year is...?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [14]

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Yes, I think...

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - MD & Head of Research [15]

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And the pace that we're seeing here -- you got the accretion headwind too, as we move into '19?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [16]

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Absolutely. Yes, you're right. The accretion from the prior acquisitions is definitely dropping. So yes, I mean, I think, over the next quarter or 2 -- for fourth quarter, I'm going to just stick with that. I think we'll stay in the 320 to 325 range is our best guess at this point for fourth quarter.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [17]

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This is Peter. So just -- you guys spoke about loan growth and how that's, kind of, slowed from the low double-digit pace last year, down to the mid-single-digit range. You, kind of, guided to that in the fourth quarter as well. But with the Asheville, to know it will be coming online early next year, and you kind of mentioned a renewed focus on loan growth as well. Do you see any kind of ramp up at any point next year in terms of growth?

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Roger D. Plemens, Entegra Financial Corp. - President, CEO & Director [18]

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I think about Asheville, we already have the lenders there, we have the LPOs, we'll probably not going to see much in the way of increase there and just when additional commercial lenders.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [19]

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Okay. Yes, most of my other questions have been answered. But maybe just one housekeeping item, how much accretion income was there in this quarter?

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [20]

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Peter, we're running about $50,000 a month, so about $150,000 a quarter.

Is there, any other questions? We're happy to take any.

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Roger D. Plemens, Entegra Financial Corp. - President, CEO & Director [21]

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Thank you very much for joining us on the earnings call.